Ch10.0.pptx - Chapter 10 Mechanics of Options Markets 1 10.1 Types of Options Call option = right to buy an asset at a pre-set price(exercise/strike

Ch10.0.pptx - Chapter 10 Mechanics of Options Markets 1...

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Chapter 10 Mechanics of Options Markets 1
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10.1 Types of Options Call option = right to buy an asset at a pre-set price (exercise/strike price ) by a pre-set time (expiration/maturity date ) Put option = right to sell an asset … European option can be exercised only on the maturity date American option can be exercised on or before the maturity date 2
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Buy a Call Option 3 Initial stock price S 0 =$98 Expiration Date T=4 months Time Stock price Strike price K=$100 Final stock price S T =$115 Buy call option, pay $5/share Payoff= $115 $100 =$15 Profit=$15−$5=$10 Final stock price S T =$85 Payoff=0 Profit=−$5 S T =$102 Payoff=? Profit=?
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4 Final stock price S T Profit −$5 $10 $20 $30 $70 $80 $90 $100 $110 $120 $130 S T =$100 Payoff=0 Profit=−$5 S T =$102 Payoff=$2 Profit=−$3 S T =$85 Payoff=0 Profit=−$5 S T =$115 Payoff=$15 Profit=$10 S T =? Buy a Call Option (Figure 10.1) Slope = 1
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5 Profit −$7 $10 $20 $30 $40 $50 $60 $70 $80 $90 $100 Buy a Put Option (Figure 10.2) Final stock price S T Strike price K=$70 Option premium = $7 Profit breaks even at S T =$63 S T =$55 Payoff=$15 Profit=$8 S T >$70 Payoff=0 Profit=−$7 Slope = −1
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10.2 Option Payoff (Figure 10.5) 6 Payoff Final stock price S T Long Call Long Put Short Call Short Put K K Payoff Long Call Ma 0, 0 x T S K Short Call Min 0, 0 T K S Long Put Max 0, 0 T K S Short Put Mi 0, 0 n T S K
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  • Spring '15
  • Mohammad M. Mousavi

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